Viewers of the Mackinac Center web site can take
advantage of a feature called "Ask The Economist," in which Mackinac Center
experts will answer your economic questions online. See the instructions for
proper use of this feature at
www.mackinac.org/3619 The following is a response to one of
our web site correspondents who asked two questions, one about right-to-work
laws and the other about inflation.

Dear Sir:

Thank you for submitting your
question using the Mackinac Center for Public Policy’s "Ask the Economist" web
feature. My name is Lawrence Reed and I am president of the Mackinac Center.

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You asked, "Would right-to-work
laws benefit the economy wherever they are put into place? For example, some
people I've talked to have said that the same benefits we see from right-to-work
laws might not appear in the U.S. territories." You also asked, "I've heard that
inflation in small doses is good for the economy. Is this true?"

The Benefits of Right-to-Work Laws

Right-to-work laws benefit the economy anywhere and everywhere they are put into
place, whether in states or U.S. territories. This is because they are premised
on the time-honored principles of economic progress: competition and freedom of
choice.

Because
right-to-work laws make it unlawful to compel a person to join or to pay dues to
a labor organization as a condition of employment, they foster competition among
groups that wish to provide labor representation. And competition provides the
incentive such groups need to perform well and to please their members, who are
their customers.

No true
competitor can take his customers for granted. Under a right-to-work law,
workers can easily take their patronage elsewhere if they become dissatisfied
with how they are being represented. This tends to keep unions and their
leadership focused on pleasing their members. By allowing freedom of choice in
labor representation, right-to-work laws foster an environment in which workers
are treated like responsible adults instead of like captive children.

Such
laws do not outlaw unions, nor do they necessarily weaken them. They simply
respect a worker's individual right not to join a union, or to quit one and join
another. This tends to create a situation in which unions are more accountable
to their members, workers are more mobile, their work hours are more flexible,
and their morale is higher than in states where there are no right-to-work
laws. All of these characteristics foster economic vitality.

What Is Inflation?

As for
your second question, about inflation, a bit of definition is in order.
Inflation is simply an increase in the quantity of money and credit. It is not
"rising prices," contrary to the impression left on people’s minds by most news
reports. Rising prices are one of many symptoms of an increase in the quantity
of money and credit. We must not confuse causes with symptoms. I point this out
because how you define inflation is crucial to providing the best answer to your
question.

Is a
small amount of increase in money and credit ever "good" for the economy? I
would answer this the same way I would answer the question, "Is a small increase
in the quantity of green beans good for the economy?"

Yes, if
that’s what market participants want, as reflected in their purchases in the
marketplace. No, if the increase in green beans is the result of government
taking one person’s tax money and handing it over to a green bean farmer to grow
more beans, or in any other ways interfering in the market in ways that
artificially boost supplies or curtail them.

In the
first instance, you have no compulsion involved, no tax power exercised, simply
free choice in the market. More people want more beans, their demand pushes up
the price of beans, and the result is a genuine, market-based signal to farmers
to grow more of them. In the second instance, people may not want any more
beans at all — but politicians have decided to manipulate price and supply
through subsidies or other artifices, for reasons having more to do with
currying favor with a desired constituency rather than with economic reality.

Similarly with inflation, in a genuine free market, in which banking is free of
government control and the market regulates the money supply, sometimes there is
indeed an increase in the demand for a medium of exchange (money). This will be
reflected in such signals as an increase in the price of gold, for instance.
That increased value then sends a signal to producers to produce more, just as
for any other commodity in a free market.

Those of
us who advocate free markets and less political control over the money supply
would never argue for an eternally fixed supply of money any more than we would
argue for an eternally fixed supply of green beans. We would argue for a
flexible, market-based and market-supplied monetary system in which changes in
supply and demand govern the money supply. We would argue against the idea of
politicians, who arrogantly believe they can know what the proper supply of
money should be, manipulating that supply for political reasons. The market
would regulate it for sound, economic reasons.

In a
free market, any increase (or "inflation") of the money supply tends to be
responsive to market conditions and is self-limiting for the same reasons you
will never find green bean producers producing endless increases in the supply
of green beans. If they get to the point where they’ve overproduced, then green
bean prices fall to unprofitable levels and the farmers then quit adding to
supply. That’s the market's way of saying, "Hey, we have enough of this stuff.
Go use scarce resources to produce something else that is in greater demand."

The
problem when government assumes control over money is that such signals from the
market can be ignored. Governments that inflate the money supply can do so to
the point that they destroy the economy, if they so choose or if their sheer
incompetence or venality leads in that direction. That has happened many times
in world history. All along the way, the market is screaming, "Enough!" in the
form of soaring prices for goods and declining value of money, but unlike the
green bean farmer, politicians don’t have to worry in the near term about
bankruptcy. They can just keep on printing paper money, and many governments in
history have done just that, destroying their money and the economy in the
process.

When
nations adopt the discipline of market-based money such as gold, the supply of
money never gets out of hand, just as in free markets, there always seems to be
just the right amount of green beans. You never have to worry about going into
a grocery store one day and finding mountains of unwanted green beans and then
going in the next day and finding none at all. Ask any former citizen of the
old Soviet Union what happens when government is in charge of producing green
beans or any other commodity.

If you
visit the "Ask the Economist" archives on our Web page, you will also find
answers to related questions about money, inflation, etc.